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SPX Corporation (NYSE:SPW)

Q1 2009 Earnings Call Transcript

April 29, 2009 8:30 am ET

Executives

Jeremy Smeltser – VP of Finance

Chris Kearney – Chairman, President and CEO

Patrick O'Leary – EVP and CFO

Analysts

John Baliotti – FTN Equity Capital Markets

Jeff Sprague – Citi Investment Research

Shannon O'Callahan – Barclays Capital

Nigel Coe – Deutsche Bank

Steve Tusa – JP Morgan

Operator

Good day everyone and welcome to the SPX Corporation First Quarter 2009 Earnings Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to the Vice President of Finance Mr. Jeremy Smeltser. Please go ahead sir.

Jeremy Smeltser

Thanks, Michelle. Good morning everyone. Thank you for joining us. With me on the call this morning are Chris Kearney, Chairman, President and CEO of SPX and Patrick O'Leary, our Chief Financial Officer.

This morning's call is being webcast with a slide presentation, which can be accessed on our website at www.spx.com in the Investor Relations section. This webcast will be available until May 13. You may wish to follow along with the webcast as we reference the detailed information on the slides.

Please note that this slide presentation also includes supplemental schedules, which provide reconciliations for all non-GAAP financial measures we reference today. Our earnings press release was issued earlier this morning it can also be found on our website.

Before we continue, I would like to point out that portions on our presentation and comments are forward-looking and subject to Safe Harbor provisions. The 2009 guidance and targets we discuss today are on a GAAP basis from continuing operations. I would also refer you to the risk factors in our most recent SEC filings.

With that, I will turn the call over to Chris.

Chris Kearney

Thanks, Jeremy, and good morning everyone. Thanks for joining us on the calls morning. As you know the challenging economic conditions we faced at the outset of 2009 deteriorated further during the first quarter. The majority of end markets have been impacted by the global recession. This is particularly true in our short cycle Test and Measurement and Flow Technology businesses, which experienced the significant slowdown in order activity as the first quarter progressed.

On April 13, we issued a press release to inform investors that we had lowered revenue expectations for Q1 and for the full-year. Additionally, we lowered our 2009 EPS guidance range to $4.40 to $4.80 per share. We are managing prudently for this recession and we’ve targeted $75 million of restructuring actions for the year.

These actions are aimed at aligning our cost structure with end market demand, reducing costs in the near-term, and positioning SPX for long-term of success. In addition to reviewing our Q1 results this morning, we will provide you with more details on the revised guidance and an analysis of the trends in our key end markets.

Looking at the results for the quarter, our reported revenue declined 14%. Organic revenues were down 7.5% due to weakness in our short cycle book in turn businesses.

Sales for tools and diagnostics were particularly weak declining more than 20% versus Q1 2008.

Foreign currency translation was at 7% headwind to reported revenue, primarily due to the dollar strengthening against the euro. Segment income decreased 22% to $126 million. Q1 segment income margins were 10.8% down 110 points from a year ago. The primary drivers were the organic revenue decline, unfavorable project mix in our thermal segment and foreign-currency headwind.

This impact was partially offset by cost benefits realized from the APV integration. Earnings per share from continuing operations were $0.76 down 34% year-over-year. Lower operating income reduced earnings by $0.42, primarily due to the revenue decline. This also included an increase in restructuring charges recorded in the period of $0.14 as compared to Q1 last year.

Below the operating income line there were several other moving parts, which Patrick will discuss in more detail later on the call. Looking at the balance sheet, at the end of Q1 we had $431 million of cash on hand, total debt increased modestly to $1.5 billion to manage working capital needs and other investments.

During the quarter, we spent $113 million on share repurchases and completed the 3 million share repurchase plan announced last December. Additionally, we invested $18 million in restructuring action and $15 million in capital expenditures. Net debt as of March 28 was just over $1 billion and our net leverage was 1.4 times.

The combination of slightly higher debt and low EBITDA increased our gross leverage ratio to 1.9 times, still within our target range. We are projecting available liquidity at the end of the year to be more than $1 billion. We believe our solid balance sheet as is well well-positioned to manage through this difficult economic environment and we're focused on maintaining our liquidity.

Our consolidated Q1 backlog was $3.2 billion. Just over half the backlog is expected to be converted into revenue in 2009 and 30% in 2010. Since the end of the year, the total backlog had declined at 7% with about 1% of that decline caused by foreign currency fluctuations.

Looking at the segments, including a large multi-year valve, the contract award in Q1, the Flow Segment backlog was up 2%. However, order activity in many of our short cycle Floe end markets decreased significantly during the quarter. The industrial segment backlog decreased 15%. As we had expected orders and our power transformer business were down 22% from Q4.

The first-quarter order rate was consistent with the December and supports our second half of 2009 revenue target for that business. The backlog in our thermal segment was down at 7%. Consistent with reports from large infrastructure OEMs, we're starting to see a slowdown of orders for new power projects.

During Q1, we experienced a noticeable decline in year-over-year order volume for cooling systems and thermal equipment. We believe this is due to a number of factors including financing issues raw material cost fluctuations and reduced electricity demand as a result of the economic slowdown.

China is the one region where power infrastructure growth remained steady and we continue to win business there. In January, we received two orders totaling $51 million to supply dry cooling systems four new coal fired power plants in China. Also in the quarter, we received an order of about $100 million to supply Westinghouse with squib valves for up to 12 nuclear plants to be built in the United States and in China over the next several years.

Towards the end of the quarter, we received another notable contract to supply our bulk and/or thermal equipment for new coal-fired plants being built in Western Europe. This contract is valued at $40 million. These others are included in our ending March backlog. Subsequent to Q1, we received another contract in China that is not in the backlog numbers reported today. This is a $36 million order to supply a dry cooling system for a new coal-fired plant in Inner Mongolia.

As I mentioned earlier, we have reduced our organic revenue expectations for the year and we do not expect a meaningful recovery in any of our key end markets in 2009. In power and energy, we are expecting revenue to be flat-to-down 5% versus last year. The decline from our previous expectations is primarily due to timing of large power projects being pushed out of the 2009.

We are projecting revenue growth from power projects in our backlog to be offset by significant declines in power transformer sales during the second half of 2009. The global market for vehicle repair tools and diagnostic equipment continue to deteriorate in Q1, due to the stress being experienced by vehicle OEMs and their dealer service networks.

Based on current conditions, we are projecting our revenue from this market to be down 20% to 25% in 2009, consistent with first quarter. We had expected the food and beverage market to hold steady in this recession based on conditions at the start of the year. However, order rates declined significantly during Q1 as our customers began to delay spending on both components and projects.

For the year, we are forecasting a revenue decline of between 5% and 10% in this market. On a consolidated basis, our revised guidance assumes an organic revenue decline of 8% to 12%. In response to the global recession the majority of our businesses have planned restructuring actions this year. They total about $75 million of expense or about a dollar per share, which is included in our 2009 EPS guidance.

The total cash spend on the APV integration and 2008 and 2009 restructuring action is estimated to be around $100 million. The projected payback period from these actions is 12 months to 18 months. We expect to see a greater impact from these savings in the second half of the year as compared to the first half.

In total, we project the restructuring actions and APV integration will reduce our global workforce by about 15%. These actions are expected to better align our cost structure with the end market demand and position SPX for long-term success. Our EPS guidance includes the dollar per share of restructuring expense and the organic revenue expectations I described.

It also assumed that current exchange rates and raw material costs remain relatively stable. Based on these assumptions are 2009 earnings per share guidance range is $4.40 to $4.80 per share, a decrease of about 30% from 2008, 12% of which is being driven by increased restructuring costs.

Our cash flow guidance remained at $230 million to $270 million, consistent with our original guidance. We expect improved working capital performance on a low revenue target and lower cash tax payments as a result of the reduced net income. And with that I will turn the call over to Patrick.

Patrick O'Leary

Thanks, Chris. Good morning everyone. I will begin with a detailed analysis of Q1 EPS. Earnings per share declined 34% year-over-year in the first quarter, the primary driver as Chris mentioned was the decline in our revenues, lower segment income produced earnings of $0.44. This included the organic decline on a $0.07 win impaired and from foreign currency fluctuations.

Q1 restructuring expense was $12 million versus $1 million in the first quarter of last year that is a $0.14 EPS headwind. Our reduced corporate expense and lower stock compensation expense improved earnings by a total of $0.18, below the line variances to last year netted to a $0.03 EPS benefit. Benefits from lower interest expense, discreet tax credit, and the reduced share count were nicely offset by a $0.22 headwind and other expenses.

This expense primarily related to currency transaction losses incurred in our thermal employee business during the quarter, compared to gains reported in Q1 last year. We expect these to specialize in Q2 based on actions taken during the quarter to initiate additional hedges and the related hedge accounting treatment.

Moving onto the segment results, I'll begin with Flow, for the period Flow reported revenue of $394 million that is down 20% year-over-year. Foreign currency fluctuations, primarily the strengthening dollar versus the Euro and the British pound reduced revenue 10%. Organically, revenue declined 10% versus last year as well.

The organic decline was caused by weakness in the majority of our Flow end markets, including dehydration, industrial mining, and food and beverage. These declines offset growth from sales into the oil and gas and power generation markets. Segment income was $50 million versus $47 million in Q1 last year.

Last year however, the segment income included $7.5 million charge required by purchase accounting to step-up APV’s inventory. So, on a truly comparable basis to last year segment income was down 8%. Margins improved to 320 points to 12.7%. Cost reduction benefit from the ATV integration more than offset margin pressure from the organic revenue declines. Flow’s ending backlog was $660 million, an increase of 2% from Q4. This included the last multi-year contract of Westinghouse.

Excluding this order the backlog declined 9%. Order rates in our short cycle component business for this segment slowed considerably throughout the quarter. Additionally, loss project activity in our food and beverage market continues to be delayed due to reduced capital project in light of the current economic environment.

For the full-year, we have produced our revenue expectations and are now projecting a decline of between 14 and 17% from 2008. This includes about an 8% revenue headwind from foreign currency fluctuations with an organic decline approaching 10%. The APV integration is on track and we have accelerated our cost reduction initiatives in other parts of the segment.

We expect the benefits of these actions to offset margin pressure from organic volume declines. For the year, we are targeting segment margins to be between 13.7% and 14.7%.

Moving onto the Thermal segment, revenue for the quarter was $342 million down 1% in Q1 last year. Foreign currency fluctuations reduced reported revenue by 6% and our organic growth was 4% in Q1. Increased sales of retaining and sales of heat exchangers supporting power generation were the primary organic growth drivers. The revenue mix in Q1 was unfavorable to profitability.

Increased year over sales of wet cooling systems and heat exchangers offset the decrease in higher margin, dry cooling revenue. As a result, segment income declined 41% to $21 million. Segment margins were 6.3% that is down 420 points versus last year. For the year, we are forecasting revenue of between 2% up or down versus last year. We are expecting foreign currency fluctuations to reduce reported revenue 5%.

Organic play, we are targeting single-digit revenue growth. Based on the production schedule our projects and our backlog, we expect the mix of dry cooling revenue to increase as a percent of sales in the second half of the year. We're targeting full-year margins between 10.2% and 11.2%, backlog for Thermal declined 7% during the first quarter. As Chris mentioned, during the first quarter the orders for life power projects were down year-over-year.

As expected, it was another very challenging quarter for a Test and Measurement segment. Q1 reported revenue was $196 million that is down 27% from the prior year. Organic revenue declined 21% and foreign currency fluctuations reduced revenue by 7%. The organic decline was driven by continued stress on global vehicle OEMs and their dealership network.

OEMs are aggressively controlling (inaudible) and our very sensitive for the difficult environment their dealers face. Dealers are always struggling with significantly lower unit sales and are being forced to curtail discretionary spending. Global after-market sales were also down year-over-year. Segment income was $6 million for the quarter and margins were 3%. For the year, we have reduced our revenue expectations based on the Q1 results.

We are expecting organic revenue to decline over 20% and foreign currency to be a headwind of 6%. We have been aggressively reducing cost structure in this segment. In Q1, we reduced headcount by 220 employees. For the year we are targeting a total headcount reduction of about 550 employees. We expect the cost savings from these actions to benefit margins as the year progresses. For the full-year, we are targeting margins between 5.5% and 6.5%.

Moving on to our Industrial segment, for the first quarter, industrial reported revenues of $230 million that is down 5% in Q1 last year. Organic revenues declined 4% and foreign currency translation reduced reported revenue by 1%. Primary organic decline was caused by decrease in sales by hydraulic tools that serve a number of infrastructure and industrial markets.

Segment income was $49 million in the first quarter, down 9% year-over-year. Margins for the period were 21% down 110 points from a year ago. These results for Q1 benefited from solid execution of the year-end backlog in our transformers, solar, and aerospace businesses. We have similar expectations for Q2, however we expect the second-half of the year will be more challenging.

During the first quarter, the backlog in our industrial segment declined 15% to $468 million. As we've indicated previously, the order rates of transformers began to slow significantly towards the end of 2008. Q1 orders were down 22% through Q4. However, this was consistent with our 2009 revenue expectations.

Our customers are balancing the need to replace aging transformers with managing reduced capital budgets. Buying decisions are also being impacted by raw material cost fluctuations. As a result, we are seeing increased pricing pressure in the marketplace.

In our solar business, live-progress [ph] for our crystal growing equipment used in the production of solar panels are being delayed. We expect these backlog and order trends to continue and combine with continued pressure on a shorter cycle industrial businesses have a significant impact on sales in the second off of the year.

We are expecting revenue declines versus the prior year to exceed the 30% in the third and fourth quarter of 2009. For the full-year we are forecasting revenue to be down 20% to 25%, with margins between 18.5% and 19.5%. As you know we have a 44.5% interest in a joint venture with Emerson Electric or EGS that comprises the majority of our equity earnings.

The economic downturn is also impacting this business. Like many of shorter cycle businesses EGS experienced deteriorating order trends across its end markets as the first quarter progressed. For the year, EGS is now expecting revenue to decline more than 20% from 2008 and accordingly we have reduced our target for equity earnings in 2009 to $31 million, that's down 33% from 2008.

Moving on to free cash flow, we had a net usage of $51 million during the period. The reduced segment income accounted for the majority of the decline in free cash flow in Q1 last year. Additionally, we invested $18 million in restructuring actions, $15 million more than the first quarter a year ago. We had a net working capital investment of $135 million and capital expenditures totaled $50 million in the period.

Cash usage in Q1 is consistent with prior year's performance and the seasonal mix of our businesses, historically free cash flow performance has improved as the year progresses with the majority of our annual cash flow generated during the second half. We expect 2009 to follow the same historical pattern and we expect to meet our full-year free cash flow target of between $230 million and $270 million.

We have maintained a consistent approach to capital allocation during the past four years. Our target range for gross debt to EBITDA is 1.5 to 2 times. As Chris mentioned this ratio was 1.9 times at the end of Q1 within the target range, when levered about two times, we focus available capital on debt reduction, when levered within the target range we expect capital investments to target strategic acquisitions and/or return capital to shareholders.

We completed the most recent share repurchase plan during the first quarter. Since November last year, we have repurchased 6 million shares of about 12% of the outstanding share base. In this economic environment our current focus is to maintain our liquidity.

In closing, let me briefly review the assumptions for our full-year and second-quarter EPS guidance. For the full-year we are targeting total revenue of about $5 billion that is down about 14% from last year. We expect foreign currency fluctuations to decrease reported revenue by about 5% and organic revenue to be down 8% to 12%.

Segment margins are targeted between 12% and 13%. As Chris mentioned we now have about $75 million of restructuring expense planned for this year. Our 2009, midpoint EPS guidance is $4.60 per share. That is a decrease of about 30% year-over-year. This assumes a 32% tax rate and just under 50 million shares outstanding.

A detailed model to the midpoint of our EPS guidance range is available in the appendix of this presentation. As I mentioned, our free cash flow guidance is $230 million to $270 million and that includes $65 million to $85 million of cash restructuring and $90 million to $100 million of capital spending.

Looking at the second quarter, we expect reported revenues to be down 16% to 20%, including headwind from foreign currency translation of about 8%. Segment income is targeted to be around $140 million that is down 32% from $207 million last year. And segment margins are targeted to be between 11.0% and 11.5%.

We are expecting Q2 restructuring expenses to be approximately $30 million that is about three times what we reported in Q1 and significantly more than the $4 million we reported in the second quarter last year. Our EPS guidance for the second quarter is $0.65 to $0.80 per share.

With the reduced share count the sensitivity of our EPS calculation has increased significantly. In our 2009 model $750,000 of operating profit is equal to a penny of earnings per share. Certain events could have an impact on a guidance, including changes in microeconomic trends that influence our organic revenue, foreign currency translation, and raw material costs.

The timing and execution of restructuring actions, capital allocation decisions that could result in acquisitions, disposals or additional share repurchases that change in our effective tax rate. With that I will turn the call back to Chris.

Chris Kearney

Thanks, Patrick. Global economic conditions are obviously difficult and in response to the current state of the global economy, the majority of businesses are in the process of restructuring actions this year. As I mentioned earlier we have a dollar per share of $75 million of restructuring actions currently projected in our guidance.

These actions are expected to mitigate to some degree the current end market pressures we are experiencing. They also focused on increasing the efficiency and flexibility of our operations over the long-term. In total, we expect to reduce global headcount again by 15% based on the 2008 restructuring and 2009 targeted actions.

We expect this will position us to better leverage future revenue growth. If the economy continues to decline, we are prepared to take additional restructuring actions as necessary. Our financial position is strong and we believe we have ample liquidity. We intend to maintain our liquidity given the uncertainty in the global economy. And although the current environment is challenging, we remain confident in our long-term strategy and committed to executing it.

Thanks again for joining us and at this time, we are ready to take your questions.

Question-and-Answer-Session

Operator

(Operator instructions) And we will go first to John Baliotti with FTN Equity Capital Markets.

John Baliotti – FTN Equity Capital Markets

Hi Chris.

Chris Kearney

Hi John how are you doing?

John Baliotti – FTN Equity Capital Markets

I'm well, how or you? I'm just curious, could you kind of may be handicap the trends you're seeing in the first quarter for things like thermal, transformers, food and beverage versus let's say the long-term, you know secular, I guess how much of what you saw in the first quarter maybe with feedback from your operating guys or the customers, do you think is indicative of what's going on currently versus what – if there is any change in the secular expectations?

Chris Kearney

Yes sure John. There is no question that what we are experiencing in terms of slow down in those segments is reflecting, the global economic condition. As we've said consistently, we positioned this company starting four years ago around three quarter growth areas that have been very, very attracted to it because of the underlying dynamics in those markets and power and energy infrastructure and process equipment particularly in the food, beverage, dairy market. And ultimately we believe in the Test and Measurement segment as well given the evolution in the shift of that business outside the United States to developing markets and to greater relationship with key successful global OEs around the world.

So the underlying dynamics were absolutely committed to and we believe – and we think that the things that we are doing in reaction to the slowdowns we are seeing in this market in 2009 are intended to be thoughtful and targeted and to make the organization more lean and efficient going forward, so as those markets begin to recover we are better positioned than we were even going into this downturn. So, yes, there is no doubt that we're – we believe in the growth drivers long-term in this business and I think we will come out of this difficult year hopefully even better positioned.

Patrick O'Leary

And it’s certainly worth mentioning John, quarterly order trends particularly in the thermal segment really aren’t meaningful, we have substantial fluctuations in the size and amount of orders, obviously we've got a significant backlog in that segment. But there is still credible quoting activity and you are going to see continued lumpy performance and certainly at this point, it’s not appropriate to conclude that what we saw in Q1 internal is our long term trend.

John Baliotti – FTN Equity Capital Markets

Yes, I guess this is a follow-up to that Pete [ph]. It seems like the way the industrials are coming out with commentary is that and the way that markets reacting seems like end markets that are considered highly volatile or sensitive to economic changes or there is more positive tone in – you know the end markets are weaker, because the expectation and things I am going to cover in those end markets are going to take off and I would think that there is going to be some moves in these end markets as well because of credit eases and so on that obviously the long term demand for transformers as they done as an example.

Chris Kearney

Yes, that's absolutely right. I mean the power grid in this country certainly isn’t getting any younger, it is aged and I think the replacement dynamics along with the reliability standards that have been imposed certainly underscore that. And I think if you look at developing parts of the world, where we are still seeing like in China, where we are still seeing some healthy orders over the last six months and continuing into this year, and you look at South Africa where there is severe under capacity. The only thing that has changed is the current economic environment and the difficulty in terms of financing project short-term, but long-term those dynamics you're right, I mean they haven't changed and would I think support the long term due that we have in the business.

John Baliotti – FTN Equity Capital Markets

Okay. Great, thank you Chris.

Operator

Next, we’ll go to Jeff Sprague with Citi Investment Research.

Jeff Sprague – Citi Investment Research

Thank you, good morning. Just a little more focus now on the near term, obviously the facilities are back end loaded company, but as I think – as a progression we have got here – we’ve got transformers much tougher in the back half of the year and it looks like restructuring ramping up in the back half of the year, Patrick I was just wondering if you could walk us a little bit to how you think you get to the midpoint of that guidance, I would assume that the restructuring benefits are big part of it, so maybe you could give us a little color on–

Patrick O'Leary

That’s a great – that's a great question. I mean, there is obviously a stronger second half of earnings and restructuring is one very important factor, our guidance assumes $75 million of restructuring expense for the year or $1 share as you heard it. Approximately 42 million of that is expected in the first half, so we should have about $10 million benefit in the second half due to lower restructuring expense. The benefits that we're reaping should be greater as well. We're expecting savings from restructuring actions to be about $20 million higher in the second half as compared to the first half. So combined there, you can see $0.40 to $0.50 of EPS benefit in the second half.

And then, looking at the businesses, in the second half of 2009, we are forecasting an increase in project work based on orders that are in our backlog both in the thermal and in the flow segments. In thermal, we have a pick up of dry cooling systems are most profitable, profit line in China that we expect we’ll benefit in revenue and margin sequentially. And additionally about 18% of the flow segment is from sales of boiler and other personal copper heating equipment, mostly into the U.S. residential and commercial applications. And this business historically has much higher volumes at significantly better profitability in the second half of the year as customers replace aged equipment in account to the winter season.

And you saw quite a lot of over line chart for foreign currency in the first quarter, but obviously will not be continuing in the second half. So we expect the combination of these changes to offset the declines that we expect in the industrial segment due primarily to lower transformer and crystal grower sales in the second half.

Jeff Sprague – Citi Investment Research

So that currency hit was, you were just out as cyclones and hedges or something and that’s been correct

Patrick O'Leary

I mean basically, yes, there was a gain in the fourth quarter that offset most of it. As we exit Q2, we will have our accounting hedge treatment and I would expect a lot less volatility in that area.

Jeff Sprague – Citi Investment Research

And just also on tax Patrick, it’s 32 for the year, but I am thinking your framework here using kind of Q1 24 rate, I do not so – are you expecting tax rate to be much higher in the back half of the year?

Patrick O'Leary

No, I mean basically if you look at the core rate, it's 33%, 34%. There are some discrete tax items in Q1 brought the rate down and we're just reflecting those same discrete items in the full year model, which is somewhat brought the weighted tax rate down to 32% that we are using right now.

Jeff Sprague – Citi Investment Research

And then just a little more color on transformers, the transformers shipments I guess were roughly flat in the quarter.

Patrick O'Leary

In Q1, the orders were down about 22% sequentially from Q4 and we are down year-over-year about 50%. This decline was anticipated in our original guidance and it's the primary driver of the 30% revenue decline that we expect in the industrial segment in the second half. And what’s going on here is our customers are balancing the need to replace aging transformers with managing near-term capital budgets.

Pricing, as I mentioned in the prepared remarks, has become more competitive in the marketplace. The decline in the input cost of copper and oil has impacted pricing and the contribution margin has come down after the peak that we saw in the third quarter of last year. I mean, it's too early to predict what next year will look like, but on an annualized basis at current order run rate, we project order shows revenues to be about $350 million annually. And if order rates remains stable as this year continues, we clearly will be looking at pretty tough first half comparisons next year and steady accounts in the second half of the year.

Chris Kearney

You are right, Jeff. In the first quarter and probably again in the second quarter, we're expecting just a slight organic decline in sales in that business.

Jeff Sprague – Citi Investment Research

And so the price is coming down more rapidly than your cost inputs, squeezing margins in the business?

Chris Kearney

On an incremental basis, yes.

Jeff Sprague – Citi Investment Research

And Patrick, can you give us any early read how you think about pension expense for 2010?

Patrick O'Leary

We are using a long term investment assumption of 8.5%, so obviously variations of that is going to give us some negative amortization going forward. This kind of rate tapping pretty volatile and I think as you know I mean for us we have a perfect [ph] pension plan where all the participants are best fit and there is no new entrance, so the drivers of our accounting are really, are the investment return and the assumptions that we use. We have been moving to more of an asset liability matching, so we didn't have anything like the investment losses in the portfolio last year you saw across the broad market. So I would say at this point, it's too early to say to give you an EPS estimate. I mean it's looking like it will be what I would describe as a mild negative, I certainly wouldn't expect it to be one of the big drivers of earnings change in 2010.

Jeff Sprague – Citi Investment Research

Thank you.

Operator

And next, we will go to Shannon O'Callahan with Barclays Capital.

Shannon O'Callahan – Barclays Capital

Hi.

Chris Kearney

Hi, good morning, Shannon.

Shannon O'Callahan – Barclays Capital

Just a follow-up a little more on the transformer point, I mean you mentioned the orders down 22% sequentially that was in line with your guidance, we had the big falloff kind of start at the tail end of last year, can you talk about how those orders have been tracking versus kind of the ’08 exit rate?

Chris Kearney

I think fairly consistent with the exit rate of December is what we experienced in the first quarter, so therefore pretty consistent with our guidance for the year in that segment.

Shannon O'Callahan – Barclays Capital

Okay. So you have seen I mean the kind of the short fall off these monthly sequential kind of basing out, so I should mention next year if this continues, you have a tough comp against the backlog in the first half, but you are seeing sort of a monthly sequential basing out here.

Patrick O'Leary

Right. I mean, the order trend – the monthly trends aren’t necessarily indicative, but if you looked over three or four month period, the order trends seem to be leveling out at this reduced level. I think the fact that going forward, perhaps might be more related to what happens to pricing than necessarily what happens to volume.

Shannon O'Callahan – Barclays Capital

Yes. Although I mean, what do you think about that, I mean – obviously I mean in the last cycle, the volumes got so bad that the pricing got even worse. I mean if things are basing out that, I know you (inaudible) impacting the price pressure, but if demand stabilizes I mean do you expect the industry to behave more reasonably?

Patrick O'Leary

I would describe the industry as competitive and I would describe the pricing trend right now to be on its way down. I mean obviously we've only got the build two factories. I think there is an element of opportunism with the customers where they are looking at this overall pricing environment and perhaps will start placing orders for 2010 because they think the prices right now are not sustainable and it's interesting – we are still – I think we explained before that we give customers a choice here, we are still experiencing most customers are (inaudible) to manage the material price risk by paying significant cash deposit. And so in that sense, that’s say the law about how the customers feel about the potential and so we’ve got some higher end electrical grade fields [ph] and despite what you see in the market for the last few months for us, we’ve not experienced substantial declines in the cost of those materials, obviously you see what pattern of the copper as well.

Chris Kearney

And what we are seeing though I think it’s another underlying dynamics Shan, the investment grade financing is getting better and I think it's a reasonable anticipation that electricity demand will rise as the recession abates. So long term trends I think are good.

Shannon O'Callahan – Barclays Capital

Okay. And then just on food and beverage, I mean – as you said you expected it to be more stable and you are seeing some negative impact on the large projects, could you just confine the large projects or are you seeing deferrals of all kinds of smaller projects or replacement activity. I mean can you scope a little bit for us, is this is a re-evaluation of the stability you expected from that market or is it just more of a short-term correction that you expect to normalize?

Patrick O'Leary

If you look at how the year ended and the quarter started, there was still was a lot of quoting activity in this market for – particularly for larger projects. A larger project in our flow segment might be between $5 million and $15 million. And so, I think there is number of reasons why customers are more inclined at this point to delay the investment decision and the award, and some of that is the overall environment, some of that is company specific and some of that again is uncertainty about what the material price dynamic will be and what the competitive dynamic will be if the overall market continues to be difficult. So it is mostly in the larger projects, although we are seeing a slowdown in the concerned [ph] business and I think for the short cycle part, I mean clearly we’ve got limited visibility in what we are doing with our forward model is really taking our current run rate and intelligence from the quoting activity married with our expectations for, I will call it a handful of identified larger projects that we expect to execute in the second half and that's been the basis of how we construct for that.

Shannon O'Callahan – Barclays Capital

Okay. Thanks guys.

Chris Kearney

Thanks, Shannon.

Operator

And next, we will go to John Inch with Bank of America. And sir, your line is open.

And next, we will go to Nigel Coe with Deutsche Bank.

Nigel Coe – Deutsche Bank

Good morning.

Chris Kearney

Good morning, Nigel.

Nigel Coe – Deutsche Bank

Obviously, a lot of questions really on (inaudible). We haven’t talked about the stimulus, obviously it’s quite a lot of funds for transmission networks, but have you obviously had a chance to digest clarification – I mean to what extent do you think you will benefit or how – at what time, do you think the funds will benefit the kind of power range that you specialize them.

Chris Kearney

Well, I think the stimulus fund module are more directed at alternative energy sources and clean energy solutions across the board and that's fine with us because as you know that’s the future orientation of our product development any way, but as alternative sources of power generation become the focus of stimulus R&D funding, whether it will be solar or wind, that creates ultimately for us demand – new demand for the transformer business as new power generation or distribution grids need to be established. And then with respect to our thermal business, I think some of the new technology that we are developing albeit in whether it’s in wet or dry or hybrid cooling solutions, I think that plays very much to our strong hand. So we have been – we have a task force assembled in-house, we’ve been working with some folks in Washington and directly with our customers to try and be in the mainstream of those next-generation product developments where I think the stimulus funding is really focused.

Nigel Coe – Deutsche Bank

So would you expect – given your initial comments, would you expect the either ramp up shipments of 100 NVA [ph] plus type transformers and there are CapEx (inaudible).

Patrick O'Leary

I don’t think that the – I don’t think the impact ultimately on any of the stimulus activity is going to be – is going to have a real short term impact on the business. I think it helps focus and drive R&D effort more for longer term solutions and so I don’t think it's going to either require additional short term CapEx spending to direct ourselves to that solution. I think it's really more focused over the long term, and I think that’s healthy, I think that’s good, we are excited to participate in it, but I think in terms of our short term planning of the business, we really don’t anticipate that to having a significant effect.

Nigel Coe – Deutsche Bank

Okay. And then moving to test and measurement, obviously you’ve taken down the verifications [ph] quite a bit, that’s – how do you handicap everything with GM, Chrysler, the (inaudible) shut down – how do you reflected that within your guidance, do you – I mean is that all within the guidance at this point?

Patrick O'Leary

It is and just as kind of reset everybody’s thinking on that in terms of the impact of GM, Chrysler or Ford on our business, it’s not nearly as significant as it has been historically even in the short pass, but right now about 15% of our 2009 revenue target for test and measurement is related to business with the Detroit III and or dealer networks. At the end of March, we had slightly more than $20 million of outstanding receivables from them combined, so our net exposure on the top line and in terms of our cash collection is not anywhere near significant as it has been in the past and so we are monitoring the pending situations with both GM and Chrysler, we are conducting our current business with them carefully given the circumstances.

Our strategy for this business has really been focused on globalization and we believe that future growth will come from developing and extending our global partnerships with other global OEMs. And we believe that our partnering with European and Asian OEMs is a key strategic initiative for future growth in this business. And so if you look at the evolution of that business as I have described in the past, its been a tough couple of years and really going back to the second quarter of 2007, and but underwriting all of that as we’ve gone through the painful restructuring in the U.S. particularly, underlying all of that its been a very successful development of these relationship with other global OEs. And so that’s happening, the customer base is shifting, and the nature of the products underlying that business have changed pretty dramatically to some pretty sophisticated electronic diagnostic equipment, a new global platforms for these other OEMs around the world.

So we think the evolution of the business has been in the right direction. We think we’ve got in great traction in Europe as a result of the acquisitions we’ve done there over the past several years. We made significant investments in the Asian markets, specifically in China, much of the future R&D effort and current R&D effort is really focused in that geography. So I think this year will continue obviously to be tough. I think when we get out of this year and we somewhere down the road start to see the unit sales increase, I think we positioned ourselves with right players around the world and in the right geographies and will have a much better cost structure going forward, so I think it will – I think we are doing right things.

Nigel Coe – Deutsche Bank

Yes, this is the final one. Obviously cost savings are critical to the second half guidance, can you just be little more grammar in sense of how the cost savings from the headcount reductions fulfill through quarter-by-quarter and maybe give a bit more color on cost savings by segment as well.

Patrick O'Leary

Well, I don’t have that data right in front of me and obviously these restructuring actions are predominantly headcount reductions and they are taking place in a stage fashion in Europe with a more – with a longer prospect that goes through based on discussions that need to take place in advance with the works councils. So what I would say is, the actions taken with domestic employees’ payback faster than the actions taken with international employees based on overall level of cost. We are taking actions in all poor segments and in various businesses with the segments, and they are progressing according to the overall 15% headcount reduction plan that Chris described. Is there room for volatility on restructuring between quarters based on execution or regulatory issues, yes, absolutely, what we are getting today is our best guess is to how Q2 restructuring will take place. But in terms of the savings I really wouldn’t go any further than I did in response to the earlier question in terms of savings we expect in the second half.

Nigel Coe – Deutsche Bank

Understand. Thanks a lot.

Patrick O'Leary

Thanks, Nigel.

Operator

And next, we will go to Steve Tusa with JP Morgan.

Steve Tusa – JP Morgan

Hi, good morning.

Chris Kearney

Hi, good morning Steve.

Patrick O'Leary

Hi, Steve.

Steve Tusa – JP Morgan

Just a few questions on the transformer side, so you talked about the $350 million run rate, is that the run rate that will be suggested by the current rate of orders or is that the run rate just kind of what you are exiting the year on a revenue. So how much of a line of site do you have on that – on that 350?

Patrick O'Leary

It’s basically the run rate suggested by current order levels. In other words, what the business would look like on an annualized basis with the current orders.

Steve Tusa – JP Morgan

Okay. And I think from a pricing perspective, I believe one of your competitors talked about push back and kind of the double digit range, so I push back in pricing of I don’t know 10% to 15%, how much of (inaudible) higher than that. Is that in a ballpark of what you guys are seeing or are you seeing something different, I am just trying to – you mentioned prices such a big variable here and obviously you are not going to be laser specific on it, but I am just curious – a range here.

Patrick O'Leary

From peak pricing, what you are saying is about right. The problem is in fact that one, there is obviously good post call [ph] information and so you are competing on individual products and then you are looking at whether or not you own the project and you have information – pretty good information about how they are pricing. So what I would say is, we are seeing more variability in certain projects and then the market will respond. As volumes – overall volumes come down, obviously people are trying to absorb their fixed facility cost and they may choose to be a lot more aggressive on an individual quote simply depending on their own needs to absorb cost. So it’s too early to predict how pricing will level out, but it clearly has a downward trend at the moment.

Steve Tusa – JP Morgan

So are you talking about these kind of – it’s a different business than it was last cycle and a different dynamics this time, but how do we think about the – what kind of action do we taken or what are the reasons why you should have a higher trough profitability this time around?

Patrick O'Leary

I think the factor was what Chris mentioned earlier, I mean the catalyst for this downturn obviously started with financing, the investment grade utilities, another [ph] double digits and in late Q3 and early Q4 last year that’s obviously gotten better, a bit of a reprieve from electricity demand in the recession, but we believe that with financing turnarounds and with that underlying electricity demand, the decline abating as we come out of recession, but the long term factors and the age of the average transformer network in the 25 to 30 year range that we really have a different sort of catalyst coming out of this downturn.

Steve Tusa – JP Morgan

So basically your trough volume levels are going to higher this time around?

Patrick O'Leary

Potentially, the volumes would never – never necessarily a major issue for us in particular given the strong relationships we have with our key customers. What I think the other interesting thing that is different between now and coming out of ’02, ’03 [ph] and the increased regulation that we see in the U.S. which really didn’t exist in the last downturn.

Steve Tusa – JP Morgan

Okay. So but it is similar level of volume or do you assume similar level of margin or is that you are saying no.

Patrick O'Leary

Well, I mean that’s going to depend entirely on what raw materials are doing and how long the downturn would last. That’s really too early to call such a trend.

Steve Tusa – JP Morgan

Okay. Thanks, I appreciate the color.

Chris Kearney

Thanks, Steve.

Operator

And we will take our final question from Jeff Sprague with Citi Investment Research.

Jeff Sprague – Citi Investment Research

Hi, thanks. Just a follow-up on restructuring Patrick, what do you see is the year-over-year carry over benefits from the ’09 actions into 2010?

Patrick O'Leary

I mean I think – I mean it’s clearly an important question. I guess I would say I don’t envisage overall that we would have $75 million of restructuring charges next year. I think that will be from (inaudible) honestly given you an estimate of what that is. There will be some incremental payback from the actions that we taken. We started out fairly strongly actions in Q1 and Q2, and so I think that’s going to be more of a factor with sort of the first half of next year versus the second half, but really its way too early to kind of put those kind of estimates out.

Jeff Sprague – Citi Investment Research

And just a follow-up on thermal, we expected better project mix that you see in the second half, just – how affirm do you think that is and in other words, is that stuff that could easily slip into the early part of next year or is the –

Patrick O'Leary

I think it’s relatively firm in terms of the backlog that we have. We are – we are not experiencing significant changes in firm backlog with respect to subsequent execution. We are experiencing delayed decision making on projects that we are currently negotiating that are potential orders going forward.

Jeff Sprague – Citi Investment Research

Okay. Thank you.

Patrick O'Leary

Okay. Thanks, Jeff.

Jeremy Smeltser

Great. Well, thank you everybody for joining us. We’ve actually gone through all the questions. (inaudible) Ryan and I will be available all day in the office today for any additional questions. Thanks and have a great day.

Operator

This concludes today’s conference. We thank you for your participation.

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